Challenges for the Future of Chinese Economic Growth

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Abstract:

The Chinese economy has been growing at a rapid pace for over thirty years. Most of this growth has come from higher labor productivity, while growth of employment has diminished along with a slower rate of increase in the working-age population. This paper looks at the challenges that China will face over the next two decades in maintaining its rapid pace of economic growth, especially as working-age population growth slows further and then begins to decline. Key questions include whether China will be able to continue to devote nearly half of its GDP to investment, whether such investment will become less productive as the capital-labor ratio continues to rise, whether labor participation and employment rates will fall as the population becomes less rural, and whether future shifts out of rural employment will go more toward the services rather than the manufacturing sector, where productivity is higher. In the baseline scenario economic growth falls gradually from its current pace of about 10 percent to near 6½ percent by 2030. However, a combination of less optimistic, but still reasonable assumptions, results in a reduction in the growth rate to about 1½ percent by 2030.

Keywords: China, growth, potential

JEL classification: E27, O47

I. Introduction

The Chinese economy has been growing at a rapid pace for over
thirty years. From 1978 to 2011 real GDP growth averaged about10
percent per year, resulting in a more than 20-fold increase in the
level of output. Can this continue? Eichengreen et. al. (2011)
argue that the evidence from other countries suggests it cannot,
and in fact the economy has already slowed in the past couple of
years.

Although some of the recent slowing may be cyclical, there also
has likely been some cooling in the rapid pace of trend growth.
This is not surprising-a continuation of growth rates near 10
percent as the Chinese economy becomes more developed would be
unprecedented. The real question is by how much and over what
period is Chinese economic growth likely to slow further. The
purpose of this paper is to try to provide some perspective on this
question by looking at some of the supply-side factors that
influence the rate of Chinese GDP growth.

The GDP growth rate is the sum of the growth in employment and
the growth in output per employee. China faces challenges in both
of these categories. The rate of working-age population growth has
fallen from 2½ percent in 1979 to less than one percent in
2011, and is expected to turn negative before 2020. With nearly 80
percent of the working-age population already employed, there is
not much room for employment growth to exceed working-age
population growth. Thus, in all likelihood, virtually all of the
increase in Chinese GDP over the next couple of decades will have
to come from increased output per worker, or labor
productivity.

Productivity gains are in fact already providing the bulk of
Chinese economic growth. As illustrated in figure 1, the
contribution of employment growth to overall GDP growth (the blue
bars) has fallen considerably over the past three decades.
Productivity growth (the combination of the red and green bars) has
so far risen to offset the decline. Most of the productivity gain
has come from increases in efficiency within sectors, the red bars.
However, a substantial shift of employment from the lower
productivity primary (mainly agriculture) sector to the
higher-productivity secondary (mainly manufacturing) and tertiary
(services) sectors also has contributed to aggregate productivity
growth, as measured by the green bars.

There may be limits to the extent to which each of these factors
can continue to contribute to productivity growth. Within-sector
productivity growth has been facilitated by very high rates of
investment that may be difficult to sustain as living standards
improve and demand for consumer goods picks up. Furthermore, as the
capital stock grows an increasing share of investment needs to be
devoted to replacement, leaving less room for net investment. Also,
as the capital-labor ratio continues to rise as employment is flat
or falling, the marginal product of the additional capital is
likely to fall.

In addition, while there is still considerable scope for labor
to move from the primary to the other sectors, it is diminishing
over time. The share of employment in the primary sector has
already fallen from 70 percent in 1978 to around 35 percent in
2011. The share of the secondary sector is now about half of GDP,
much higher than in most other countries. This suggests that
further movement out of the primary sector in China is more likely
to be into the tertiary sector, where the productivity dividend is
lower.

As we look forward, some of the key factors that will determine
the extent to which China is able to maintain its current rapid
growth rate are:

(1) Will the
current high rate of investment to GDP be sustained?

(2) Will
diminishing marginal returns to increases in the capital-labor
ratio accelerate as the capital stock continues to grow while the
labor force does not?

(3) Will growth
of employment match that of the working-age population, or will
there be a significant decline in the employment-population ratio
as the workforce continues to urbanize?

(4) Will future
labor reallocation be dominated by shifts from the primary to the
tertiary sector rather than to the secondary sector?

(5) To what
extent will increases in human capital be able to offset some of
the potential negative effects?

The paper first attempts to arrive at a reasonable baseline
scenario for Chinese economic growth over the next two decades and
then outlines some of the risks that could result in a much weaker
outturn. It is of course entirely possible that growth could be
stronger than projected in the base case. However, it seems
unlikely that the Chinese economy will be able to outpace the 10
percent average growth of the past decade, suggesting that might be
considered a reasonable upper bound. Some of the factors that could
contribute to a stronger outcome, such as more human capital
growth, are more difficult to quantify, but are addressed in a
discussion of other risk factors for both better and worse
outcomes.

The paper is organized as follows: section 2 describes the data,
section 3 provides an overview of historical developments, section
4 describes the methodology, and section 5 presents the results of
a baseline and five alternative scenarios. Section 6 discusses some
of the issues that are not covered in the alternatives, but which
could have an important effect on the outcome. Section 7
concludes.

II. Data

Capital Stock

There is no official capital stock or price-adjusted investment
series for China. Capital stock series have been constructed by a
number of analysts, including Yanrui Wu (2009), Chow and Li (2002),
Holz (2006), and Perkins and Rawski (2008). Of these, only Wu
constructs capital stock by sector.

The capital stock series from the various studies are compared
in table 1. All of the estimates in the table are in 2000 RMB. Both
Holz and Perkins and Rawski calculated their estimates in 2000
prices; Chow and Li and Wu presented their estimates in 1978 RMB.
The latter series have been converted to 2000 RMB for comparison
using an investment deflator that was calculated from Chinese
annual national accounts data using nominal gross capital formation
divided by a constructed series for real gross capital investment.
The real series was calculated in the following way: the published
series on the contribution of gross capital investment to real GDP
growth was used to calculate the change in real investment in 2000
RMB using the formula:

where IC = contribution of investment to GDP growth, I is
investment, and GDP is in 2000 RMB. The 2000 level of investment
was then extended backward and forward using the calculated changes
to obtain a series in 2000 RMB. *Holz computes a number of
different series using different rates of depreciation. The one
shown here is the one he considers the most reliable.

Although Wu's estimated capital stock for 1998 is similar to
that of Chow and Li, both are considerably larger than those found
by the other authors. The differences between the Wu estimate and
those of both Perkins and Rawski and Holz also increase over time.
In addition, although Wu's average depreciation rates appear to be
reasonable (1.6 percent for the primary sector, 5.2 percent for the
secondary sector and 4 percent for the tertiary sector), the
aggregate implied investment series that can be backed out using
the capital stock and depreciation rates is also considerably
larger than the published investment series, as shown in figure
2.

Because the analysis in this paper requires data on capital
stock by sector, the Wu data is the most appropriate. However, the
large discrepancy in Wu's aggregate series compared with other
estimates is problematic, particularly since the paper looks at the
issue of whether the marginal product of capital is likely to fall
as the capital stock increases. In addition, the Wu series only
extend through 2006, and it is desirable to extend it using the
official investment series.

Therefore, the sectoral capital stock data were recalculated
using investment series that were derived by taking Wu's implied
sectoral investment series and multiplying them by the ratio of his
aggregate investment series divided by the official series. Wu's
depreciation rates were used. While this method is obviously
imperfect, it does results in capital stock estimates of 30.4 and
42.3 2000 RMB for 2002 and 2005 respectively, much closer to the
estimates from the other studies.

The investment series were extended through 2011 using growth
rates of investment from the National Income Accounts. It is
assumed that the investment shares of the sectors are fixed over
this period and that the depreciation rates remain the same as in
the historical series.

Employment, Labor Force, and Working-Age Population

The employment series are from the Chinese State Statistical
Office, obtained via Haver Analytics. There is a break in these
series in 1990 that has been smoothed using a growth rate for that
year that is an average of the growth rates for the preceding and
following years.

The working-age population is obtained from the U.N. population
database for five-year intervals and is interpolated to an annual
basis.

GDP and Labor Productivity

The GDP data are from the Chinese National Bureau of Statistics,
also compiled by Haver Analytics. Both the total and the industry
series are indexes equal to 100 in 1978, converted to 2000 yuan
using nominal GDP for that year. Labor productivity is calculated
as the ratio of GDP in 2000 yuan to employment.

III. Review of Historical Developments

Chinese GDP has grown very rapidly since the late 1970s, most
noticeably in the past two decades. Table 1 breaks GDP growth into
two major components, total employment and output per employed
person (labor productivity), i.e.:

Productivity is further divided into the portion due to
productivity growth within sectors and the part that is due to the
shift from lower-productivity to higher-productivity sectors,
i.e.:

(2)

where P is total productivity, pi is sectoral productivity, ei
is the share of employment in sector i, and yi is each sector's
share of GDP. The first term represents within-sector productivity
growth and the second is the effect of sectoral employment
shifts1.

The acceleration in GDP from a growth rate of 9.1 percent in the
1980s to 9½ percent in the middle period and to nearly 10
percent in the most recent period occurred as the contribution of
productivity growth picked up sharply, from 6¼ percent to
9¼ percent, while the contribution of employment growth
dropped from nearly 3 percent to about ½ percent, largely
mirroring the decline in the rate of growth of the working-age
population. In addition, the employment/population ratio increased
a little in the 1980s but has been falling more recently (figure
3).

The increase in productivity growth has occurred across all
three major sectors, but the most striking was in the secondary
sector, which had an especially impressive performance (average
annual growth over 10 percent) in the 1990s. In the more recent
decade productivity growth has slowed in the secondary sector while
increasing in both of the other two sectors. The substantial shift
of employment out of the lower-productivity primary sector into the
secondary and tertiary sectors (figure 4) resulted in a contribution
to aggregate growth of about 1¾ percentage point in the
1980s. The contribution picked up to 2 percentage points in the
1990s and has remained around that rate.

The increase in within-sector productivity was facilitated by
rapid growth in the capital stock, reflected in sizable estimated
increases in the capital-labor and capital-output ratios (figure 5)
since the early 1990s. However, as illustrated in figure 6, as the
capital-output ratio rises, an ever-increasing share of investment
in GDP is required just to maintain such high capital stock growth,
as a larger portion of investment must go to replacement.
Furthermore, as noted above, there may be diminishing returns to
adding more and more capital to a shrinking labor force.

The shift in employment toward the secondary sector in
conjunction with its rapid productivity growth has resulted in a
dramatic gain in the sector's share of output (figure 7), from
about 30 percent in 1978 to just over 50 percent in 2011. Over the
same period the primary sector's share of output dropped from 40
percent to 8 percent, while the share of the tertiary sector
climbed from 30 percent to 40 percent.

As indicated in figures 8-10, these output shares, especially
for the secondary and tertiary sectors, are unusual compared with
other countries. In 2011, the latest year for which data are
available, the primary sector accounted for 10 percent of nominal
value added, the secondary sector for 47 percent, and the tertiary
sector for 43 percent. (The shares in real terms, which are for the
projections, are a little different. The value added shares are
shown here for comparison with other countries.)

Output of the primary sector in China is still high relative to
most other countries, suggesting that resources are likely to
continue to migrate to the other sectors. The average primary share
of output is 5 percent for all countries, with the share in the
advanced economies at less than 2 percent while the emerging market
share averages 8 percent. However, the share of the secondary
sector in China (47 percent) is extremely high compared with most
other countries. The average for all economies is 30 percent, 26
percent for advanced and 35 percent for emerging markets. The
Chinese share of the tertiary sector differs from that of most
other countries in the opposite direction--the Chinese share is
only 43 percent, compared with an average of 65 percent for all
countries, 73 percent for advanced and 56 percent for emerging
markets. China, Indonesia, Thailand, and Vietnam are the only
countries where the share of the secondary sector is greater than
that of the tertiary sector. This suggests that the migration away
from the primary sector is increasingly likely to be toward the
tertiary sector. The secondary sector is also likely to begin to
shrink in relative terms as China becomes more developed.

IV. Metholodogy

In order to analyze the prospects for Chinese GDP growth through
2030, projections were made for total employment and productivity
(defined as output per employee). The forecasts for employment
growth are based on the U.N. projections for working-age population
along with an assumption for the employment-population ratio:

(1)

where E is employment, epr is the ratio of employed persons to
working-age population, and WAP is the working-age population.

U.N. population projections suggest that working age population
will drop by a total of about 1¾ percent between 2011 and
2030. The growth rate is slightly positive until 2016, a little
less than ½ percent on average, before dropping gradually
almost to a negative ½ percent by 2030. The population
projection was used for all the scenarios, both the baseline and
the alternatives. The employment-population ratio was assumed to
stay at its current rate for the baseline scenario and was varied
for the alternative projections.

The projection for labor productivity is based on assumptions
for the changes in the sectoral capital-labor ratios and the
implications for productivity. Productivity growth by sector is
projected using simple equations that relate the log change in
productivity to the log change in the capital-labor ratio
(essentially a Cobb-Douglas production function), i.e, :

(2)

(3)

where lower-case letters are natural logs.

The results from these equations are shown in table 3. The
elasticity of productivity to changes in the capital-labor ratio is
near .5 for the primary and secondary sector and about .4 for the
tertiary sector. The constant term, which represents average total
factor productivity growth over the estimation period is .02 for
the primary sector, .05 for the secondary sector, and .03 for the
tertiary sector. It should be emphasized that, these estimates
should be viewed as having a wide range of uncertainty,
particularly given the quality of the data, and are only a starting
point for the baseline scenario. Alternative scenarios assess the
effect of using different estimates for the coefficients.

The GDP forecast is obtained in several steps:

(1) The
population projection and the assumption for the
employment-population ratio generate total employment. Using
assumptions for the evolution of the employment shares by sectors,
total employment for each sector is obtained.

(2) Assumptions
are made for the rate of investment as a share of previous period's
GDP to allow for forecasts to be made iteratively going forward.
Capital stock by sector is projected using the resulting projection
for total investment, along with assumptions for each sector's
share of investment and the historical depreciation rates.

(3) Sectoral
capital stock and employment forecasts are used to calculate the
capital-labor ratios, which are then used in the equations
discussed above to obtain projections for productivity.

(4) The
productivity and employment projections are combined to produce
forecasts of GDP.

Each scenario thus requires assumptions for: the
employment-population ratio, the rate of investment relative to
GDP, and the sectoral shares of employment shares and investment.
These assumptions, as well as the coefficients in the productivity
equations, are all varied in the alternative scenarios.

V. Baseline and Alternative Scenarios

Baseline Assumptions

The baseline scenario incorporates the following
assumptions:

(1) the
employment-population ratios stays at its current level. As this
ratio has been declining for most of the past two decades, an
alternative scenario assesses the possibility that the decline will
continue.

(2) investment
stays at its current high level of nearly 45 percent of GDP. A
decline in this rate is incorporated into one of the
alternatives.

(3) employment
continues to shift away from the primary sector. The share of
employment in this sector is assumed to fall from 35 percent in
2011 to 12 percent in 2030 (figure 11). The share of employment in
the secondary sector is assumed to increase a little more, from 30
percent in 2011 to about 32 percent in 2017, and to then begin to
drop back, reaching 20 percent by 2030, as the country becomes more
developed. Employment in the tertiary sector rises to about 68
percent by 2030.

(4) investment
also is assumed to shift away from the primary and secondary
sectors toward the tertiary sector. The share of investment falls
from 4 percent in 2011 to 3 percent in 2030 in the primary sector
and from 51 percent in 2011 to 41 percent in 2030 for the secondary
sector (figure 12).

The employment and investment assumptions result in a decline in
the share of output of the primary sector from 8 percent in 2011 to
3 percent in 2030, a decline in the share of output of the
secondary sector from 51 percent in 2011 to 47 percent in 2030, and
an increase in the share of output of the tertiary sector from 41
percent in 2011 to 50 percent in 2030 (figure 13). These changes
would bring the distribution of Chinese output a little closer to
that of most other countries, but it would still be quite
different. An alternative scenario will look at the effect of a
more significant change in the distribution of output.

Baseline Results

Under the baseline assumptions, real GDP growth declines
gradually from 10½ percent in 2012 to 8½ percent in
2020 and to just over 6 percent in 2030 (figure 14). About a
quarter of this decline is due to a fall in the contribution of
employment, which goes from .4 percent in 2011 to -.4 percent in
2030. Productivity growth falls nearly 10 percent to 6 ½
percent. The decline in productivity growth is due mostly to the
reduced boost from shifts in employment shares, which becomes
increasingly less positive over the first half of the period and
turns negative in the second half, as employment begins to shift
from the secondary to the tertiary sector (figure 15).

Thus, in the baseline scenario, even though within-sector
productivity growth stays near its present level, the diminishing
rate of working-age population growth and likely increase in the
share of the tertiary sector over the next 20 years puts
significant downward pressure on China's rapid rate of GDP
growth.

Alternative Scenarios

The main results from the alternative scenarios are shown in
table 4.

1) Slower Growth in Employment

This scenario assumes that the employment/population ratio
declines by about 10 percentage points between 2011 and 2030, from
78 percent to 69 percent. The decline of about ½ percentage
point per year is similar to the average change in the actual rate
since the late 1990s, and would bring the ratio more in line with
that of most other countries. In 2009 (the latest year for which a
full set of data are available), the rate averaged 67 percent
across 42 countries, 71 percent for the advanced and 64 percent for
emerging markets. In addition, as the median age of the population
continues to increase (from 34 in 2010 to 42 in 2030), it is likely
that a greater percentage of this population will opt out of the
labor force. This may be part of explanation for the decline in the
ratio that has already occurred, as the median age increased by
nearly 5 years between 2000 and 2010. Similarly, the percentage of
the population aged 60 and over increased from 10 percent in 2000
to 12 percent in 2010 and is expected to reach nearly 25 percent by
2030. Furthermore, as more of the population moves out of rural
areas, where the entire family may be helping to work the family
farm, it is likely that more people will exit the labor force.

Together, these assumptions reduce the growth rate of employment
to -1.4 percent in 2030, about a percentage point less than in the
baseline scenario. The growth rate of GDP is 5¾ percent that
year, ¾ percentage point lower than in the baseline, as
higher productivity growth due to a higher-capital output ratio
offsets some of the slower growth in employment.

2) Lower investment as a Share of GDP

In this scenario it is assumed that the ratio of investment to
GDP falls gradually from 44 percent in 2010 to 34 percent in 2030.
The projections for the employment and participation rates and for
the sectoral shares of employment and investment are assumed to be
the same as in the baseline case.

In this case real GDP growth drops to 5.4 percent by the end of
the projection period. Productivity growth falls to just under 6
percent in 2011 in 2030, as the contribution of within-sector
productivity growth declines to 6¾ percent. Productivity
growth falls in all three sectors. The capital-labor ratio
continues to rise, but at a slower rate, with the rate of increase
dropping to about 6½ percent by 2030.

3) Reduced effect of Increases in the Capital-Labor
Ratio

The simple production function used to project productivity
implicitly assumes diminishing marginal returns to increases in the
capital-labor ratio, i.e., as the capital/output ratio rises the
absolute size of the increase in labor productivity will fall for a
given increase in the capital-labor ratio:

(4)

At the same time, the percentage increase in productivity for a
given percentage increase in the capital-labor ratio remains
constant (equal to ). However, as noted
earlier, the estimated coefficients for these equations are quite
high, and it is possible that they will begin to drop off,
particularly as employment stagnates and further gains in the ratio
come entirely from adding more capital to a constant (and
ultimately declining) workforce. This scenario examines the effect
on growth if the estimated elasticity of labor productivity
relative to increases in the capital-labor ratio declines gradually
to .3 for all three sector (from near .5 in the primary and
secondary sectors and .4 in the tertiary sector). Under these
assumptions the rate of GDP growth falls sharply, to a little under
3 percent by 2030, as productivity growth drops to 3¼
percent.

4) Drop in GDP Share of Manufacturing

As the population becomes more affluent, it is likely that the
demand for services will increase relative to the demand for goods.
In this scenario it is assumed that the share of the secondary
sector drops gradually to 34 percent by 2030, about equal to the
current average for emerging market economies, although still
higher than the overall average of 30 percent. The share of the
primary sector is still assumed to decline to 3 percent, while the
share of the tertiary sector increases to 63 percent.

Under this scenario the growth rate of real GDP falls to 4
percent by 2030. Productivity growth falls to about 4½
percent, as the effect of sectoral shifts turns to a negative
5½ percentage points of GDP.

5) Combination

This scenario combines all of the assumptions in the four
previous alternatives into a kind of worst-case scenario.
Investment falls as a share of GDP and becomes less productive,
employment growth is slower than in the baseline, and output shifts
from the manufacturing to the services sector as the economy
matures. It should be noted that these are all in fact very
reasonable assumptions.

Nevertheless, the effects on the Chinese economy are startling.
Real GDP growth drops to 5 percent by 2020 and declines further to
under 1 percent by 2030. By that time employment is contracting by
a little over 1 percent per year, and productivity growth has
fallen to just 2 percent, with within-sector productivity growth
contributing less than 4 percentage points, while the effect of
sectoral shifts subtracts nearly 2 percentage points.

VI. Other Factors

The alternatives explored above obviously do not exhaust the
potential influences on Chinese growth, both positive and negative,
that could contribute to very different outcomes than those
obtained here. A major factor that is omitted because of lack of
data is human capital. Although data on educational attainment for
China are sketchy, a recent Gallup poll showed that the percentage
of people aged 25 and older with at least a high school education
was about 28 percent, much lower than the 87 percent for the same
age group in the United States. This suggests that there is
significant room for increased educational attainment to contribute
to productivity growth going forward. Of course, this factor has
also likely played an important role in China's rapid productivity
growth in recent years. The large discrepancy among age groups--47
percent of 25-29 year-olds are high school graduates, compared with
just 18 percent for people aged 50 and over--is an indication of
the significant increase in educational opportunities that has
already occurred.

Although the rise in human capital should contribute to an
increase in total factor productivity, it should be noted that the
rate of increase in TFP assumed here, as measured by the constant
term in the productivity equations, is fairly high at 2 percent for
the primary sector, 5 percent for the secondary sector, and
3½ for the tertiary sector. This translates into a weighted
average of sectoral TFP growth of about 4 percent over the forecast
period, which is very similar to its recent rate of growth. The
average rate does not vary much across the alternatives, as the
constant term is assumed to remain the same.

Another factor that is hard to quantify is the possibility that
continued movement toward a more market-determined allocation of
capital may result in a substantial rise in efficiency that could
help to offset potential diminishing marginal returns from a rising
capital-labor ratio. The fact that the Chinese economy is still
catching up to more advanced economies may allow them to continue
to import more advanced technologies for an extended period of
time, thus also providing some offset to the factors contributing
to lower productivity growth.

VII. Conclusion

Although Chinese economic growth has consistently out-performed
most analysts' expectations over the past 30 years, there are some
important reasons to believe that such a rapid pace of expansion
may not be able to continue indefinitely. As employment growth
slows along with that of the working-age population, further
increases in GDP will depend on gains in productivity. Such gains
will in turn depend to an important extent on increases in the
capital-labor ratio. However, it may be difficult for China to
continue to devote nearly half of its GDP to investment, and such
investment may well become less productive as the capital-labor
ratio continues to soar. These factors are likely to put downward
pressure on China's rapid growth rate.

In addition, it is extremely likely that the high-productivity
secondary sector will need to shrink going forward as the economy
rebalances away from relying so heavily on exports to a greater
share of production for domestic demand. Although the enormous
Chinese market will obviously have a large appetite for
manufactured goods, consumers will be likely to demand that overall
output includes a greater proportion of services, more in line with
other countries. The positive contribution to overall growth that
is currently due to shifts between sectors is thus likely to lessen
going forward and possibly turn negative at some point.

Despite major differences in the two economies, the Japanese
experience may be instructive, particularly in light of the fact
that Japan is also facing a shrinking labor force. As shown in
table 4, Japanese GDP growth from the mid-1950s to the mid-1960s
was only about a percentage point lower than the current rate of
Chinese growth (although the ratio of investment to GDP, at 20
percent, was less than half of the Chinese rate). The rate of
growth of employment was 1½ percent, a little higher that
the current Chinese rate. However, even though the investment rate
subsequently increased and the rate of growth of the capital-labor
ratio picked up as well, the growth rate of productivity has
steadily declined and was just 1 percent over the past two decades.
Although the slow pace of expansion partly reflects sluggish growth
in Japanese demand as the economy has struggled, it may also
reflect the inherent difficultly in continuing to maintain rapid
productivity growth while the workforce is stagnating.

Most people would probably agree that the Chinese economy cannot
maintain the extremely rapid growth rates it has seen over the past
three decades indefinitely. The question is thus not whether the
Chinese economy will slow by when and by how much.

Footnotes

**.
The author is a Senior Adviser in the Division of
International Finance, Board of Governors of the Federal Reserve
System, Washington, D.C. 20551 U.S.A. Email:
Jane.T.Haltmaier@frb.gov. Telephone: (202)-452-2374; fax
(202)-263-4850.
Thanks to Louis Kuijs of the Fung Global Institute for some very
insightful comments and suggestions. The views in this paper are
solely the responsibility of the author and should not be
interpreted as reflecting the views of the Board of Governors of
the Federal Reserve System or of any other person associated with
the Federal Reserve System. Return to text

1.
There is also a small interaction term in discrete data, but in
this dataset it is never greater than .1 percent. Return to text